Drawee

What Is a Drawee?

A drawee is the party ordered by a drawer to pay a specified sum of money to a payee on a negotiable instrument, such as a check or a bill of exchange. This term is fundamental in commercial law and banking, defining a specific role within a payment transaction. In the context of a personal check, the drawee is typically the bank on which the check is drawn. The drawee is obligated to honor the instrument if sufficient funds are available and the instrument is properly presented.

History and Origin

The concept of a drawee dates back to the historical development of bills of exchange, which emerged in medieval Europe to facilitate trade across distances and reduce the need to transport physical coinage. These early instruments allowed a merchant in one city to order another merchant in a different city (the drawee) to pay a third party. The formalization of these practices over centuries led to modern commercial paper laws.

In the United States, the legal framework governing the drawee and other parties to negotiable instruments is primarily codified in Article 3 of the Uniform Commercial Code (UCC). The UCC provides a comprehensive set of laws that govern commercial transactions, including checks, promissory notes, and other types of drafts.⁸,⁷ This uniform law ensures consistency in how such instruments are treated across different states. The evolution of the modern payment system in the U.S., significantly influenced by the Federal Reserve, has further refined the processes involving the drawee, especially concerning check clearing and electronic payments.⁶,⁵,⁴

Key Takeaways

• A drawee is the party, typically a bank, ordered to pay a financial instrument like a check or draft.
• The drawee's primary obligation is to pay the specified amount if the drawer has sufficient funds and the instrument is validly presented.
• The legal framework for the drawee is primarily found in Article 3 of the Uniform Commercial Code (UCC).
• The concept originated with bills of exchange, evolving over centuries to the modern banking system.

Interpreting the Drawee

Understanding the role of the drawee is crucial for anyone involved in financial transactions using negotiable instruments. When a financial institution acts as the drawee, it holds the drawer's account and is responsible for verifying that sufficient funds exist to cover the payment. For example, in the case of a personal check, the bank where the account is held is the drawee. Without the drawee's formal acceptance or payment, the instrument remains an order and not a promise to pay by the drawee itself.

The Uniform Commercial Code specifies that a drawee is not liable on an unaccepted draft.³ This means the drawee has no legal obligation to the payee until the instrument is accepted or paid. This distinction protects banks from liability for instruments that might be fraudulent or drawn on insufficient funds before they have had a chance to verify them.

Hypothetical Example

Imagine Sarah writes a check for $500 to her landlord, John, for rent.

1. Drawer: Sarah (the person writing the check and ordering the payment).
2. Payee: John (the person receiving the payment).
3. Drawee: Sarah's bank, "First National Bank."

When John deposits the check into his account, his bank will present the check to First National Bank (the drawee). First National Bank then verifies that Sarah has at least $500 in her account and that the check is legitimate. If these conditions are met, First National Bank will deduct $500 from Sarah's account and transfer the funds to John's bank. If Sarah did not have sufficient funds, First National Bank, as the drawee, would refuse to honor the check, leading to a bounced check.

Practical Applications

The drawee concept is central to various financial and commercial activities:

• Check Processing: Every time a check is written and deposited, the drawee bank is the entity that ultimately authorizes and processes the payment. Modern regulations, such as the Federal Reserve's Regulation CC, govern the expedited availability of funds and the collection of checks, impacting how quickly drawee banks must process these instruments.²,
• Bills of Exchange: In international trade, bills of exchange are often used, where a drawee (often a buyer's bank) is ordered to pay a seller a certain sum at a future date. The drawee's acceptance of the bill transforms it into a binding obligation, akin to a promissory note.
• Commercial Paper: Beyond checks and bills, the drawee's role extends to other forms of commercial paper, ensuring clarity in payment obligations within business transactions. This applies in scenarios where one party draws an order on another to facilitate a payment.

The Federal Reserve plays a critical role in overseeing the U.S. payment system, ensuring the smooth and efficient functioning of transactions involving drawees across the banking network.¹

Limitations and Criticisms

While the drawee's role is well-defined, certain limitations and criticisms exist:

• Insolvency Risk: If the drawee bank becomes insolvent before honoring a large draft, the payee or subsequent holder in due course could face significant losses, although modern banking regulations and deposit insurance (like FDIC in the U.S.) mitigate this for individual deposits.
• Fraud and Forgery: The drawee bank bears the primary risk of honoring forged or altered instruments, as it is presumed to know its customer's signature and account status. While protections exist, such as those under the Uniform Commercial Code, banks still incur substantial costs related to fraud detection and prevention.
• Unaccepted Drafts: As mentioned, a drawee is not liable on an unaccepted draft. This legal protection for the drawee means that if a drawee bank decides not to honor an instrument (e.g., due to insufficient funds or a suspected forgery), the payee's recourse is against the drawer, not the drawee bank itself, until acceptance occurs. This can create delays or complications for the payee seeking payment.

Drawee vs. Drawer

The terms drawee and drawer are often confused but refer to distinct parties in a payment instrument, particularly a check or draft.

The drawer creates the instrument and the payment order, while the drawee is the entity responsible for executing that order by disbursing the funds.

FAQs

What is the primary responsibility of a drawee?

The primary responsibility of a drawee, typically a bank, is to pay the amount specified on a negotiable instrument, such as a check, provided the drawer has sufficient funds in their account and the instrument is properly presented.

Can a drawee refuse to pay a check?

Yes, a drawee can refuse to pay a check if there are insufficient funds in the drawer's account, if the check is post-dated, if there's a stop payment order, or if the check appears to be forged or altered.

Is the drawee always a bank?

While a bank is the most common drawee for instruments like checks, the drawee can be any party ordered to pay a draft. For example, in a bill of exchange used in trade, a company or an individual could be the drawee.